Argument recap: Justices see world through lender’s eyes in bankruptcy auction dispute
In the last week of the year’s Term, the Court took up what well might be the most important business bankruptcy case since its 1998 decision in Bank of America National Trust & Savings Ass’n v. 203 North LaSalle Street Partnership. RadLAX Gateway Hotel, LLC v. Amalgamated Bank presents a question that seems so common that the answer should be obvious: when a bankruptcy court auctions the collateral of a secured creditor, does the secured creditor have to bid with cash or can it instead offset whatever it bids with a credit against its debt. Those kinds of auctions have been routine in reorganizations in Chapter 11 (the bankruptcy code provisions that govern large business cases) since the decision in 203 N. LaSalle emphasized the importance of using open-market procedures to test the value of collateral. Lenders strongly prefer credit bids, because they need not advance cash to maintain control of the collateral. Debtors want to ban credit bids, because it makes it much easier for somebody other than the lender to acquire the collateral.
The case presents a pattern the Court has seen all too often in its bankruptcy cases: language that with little effort could be read in either direction, situated against a basic conflict between the desires of the managers of bankrupt businesses to remain afloat against the wishes of unpaid secured creditors that wish to take their collateral and shut down the debtor. At the argument, however, the Justices displayed scant interest in the idea of facilitating reorganization; they were most interested in protecting the bargain of the secured creditor.
Arguing for RadLAX (the debtor), David Neff started in on the strongest part of his case: a simple textual argument that the statute has three separate options, and that he’s simply trying to do the third, by offering the creditor the “indubitable equivalent” of the collateral – whatever it raises in a well-conducted auction. Justice Alito and the Chief Justice, however, quickly jumped in, pressing the point that he wasn’t really offering the indubitable equivalent, because (in their view) the creditor had “pretty much bargained” for the right to control the collateral “when he insisted upon security for the loan.” Justice Breyer joined in, explaining that the creditor’s views – that it should be able to insist on his collateral – made “perfect sense” to him. Most painfully for Neff, Justice Breyer emphasized that in his view the statute could be read either way; he was simply offering what made the most sense, to him, “from the perspective of a bankruptcy system.”
Perhaps the darkest point in the argument for the debtor came when Neff explained that the “stalking horse” bidder that would show up at the debtor’s sale would be likely to make payments to unsecured creditors. This plainly upset the Justices, several of whom doubtless remember the Court’s long sensitivity to insider manipulation of the reorganization process. Justice Breyer, supremely confident in his understanding of the bankruptcy perspective, suggested that Neff’s rule would facilitate corruption; he described Neff’s position as having the insiders “say to the stalking horse” that they want the stalking horse to buy “at a low price and give us a job. And if they keep the creditors out, well, that’s a big incentive. And [the creditors] are the ones who know what a hotel is worth.” That perspective resonates with the emphasis in 203 N. LaSalle on market bidding as superior to judicial valuation, and thus bodes ill for the debtor here.
Apparently putting the nail in the coffin, Justice Scalia turned the discussion to the interests of the United States as creditor – parroting the argument of the Solicitor General that approving the debtor’s plan here would prejudice the United States when it appears as a creditor – because of its general inability to advance funds to bid in a bankruptcy proceeding. [This question will be no surprise to readers of this blog’s earlier coverage of the case.]
Deanne Maynard (for the secured creditor) started her argument in the perfect place: going back to the Chief Justice’s suggestion that all the secured creditor wants here is the benefit of its bargain — control of the collateral. The Justices did not press her nearly so hard as they pressed Neff, generally asking practical questions about how the sales work in practice.
The most noteworthy point of her argument was her emphasis on the “cause” exception in Section 363(k). She argued with considerable verve that it makes no sense for Congress to say that a sale is permissible under clause (ii) on the terms set out in Section 363(k) (which requires credit bidding unless the debtor can show cause) or permissible under (iii) with neither credit bidding nor a showing of cause. Although the Justices didn’t engage her directly, they did let her make this point repeatedly, blissfully immune from the hailstorm of criticism that had greeted Neff’s every word.
When Mr. Neff returned for rebuttal, Justice Sotomayor (silent during his first appearance) confronted him directly, emphasizing her view that the rule he proposes is a big shift from traditional practice: “What’s the business value for us upsetting the norm?” He tried for a few minutes to persuade her it was not a significant change, but his time expired before he could articulate a complete answer to her question.
It is of course difficult to predict from the argument what will happen at Conference, especially in a relatively low-profile statutory case like this one. But if you’re betting based on the argument, you would be predicting an easy win for the creditors here.